- AUD/JPY regains positive traction following the overnight pullback from over a one-week top.
- The RBA’s hawkish stance, along with a positive risk tone, underpins the risk-sensitive Aussie
- Geopolitical risks and BoJ rate cut bets help limit the JPY losses, warranting caution for bulls.
The AUD/JPY cross attracts some buyers for the second straight day on Tuesday and remains well within the striking distance of a one-and-half-week top, around the 97.85 region touched the previous day. Spot prices currently trade around the 97.15-97.20 region, up nearly 0.25% for the day and draw support from a combination of factors.
The Australian Dollar (AUD) continues to be underpinned by the Reserve Bank of Australia's (RBA) stance, showing readiness to hike interest rates further to combat still sticky inflation. In fact, RBA Governor Michele Bullock last week emphasized the need to stay vigilant about inflation risks and said that the central bank will not hesitate to tighten monetary policy again if needed. This, along with a mildly offered tone surrounding the Japanese Yen (JPY), turns out to be a key factor acting as a tailwind for the AUD/JPY cross.
A former Bank of Japan (BoJ) board member Makoto Sakurai said on Monday that the central bank will not be able to hike again in 2024 and predicted a rate hike by March 2025. This comes on top of the recent dovish remarks by BoJ Deputy Governor Shinichi Uchida, saying that the central bank won't hike rates when markets are unstable. Apart from this, the upbeat market mood dents the Japanese Yen's (JPY) safe-haven demand and benefits the risk-sensitive Aussie, lending additional support to the AUD/JPY cross.
That said, persistent geopolitical risks stemming from the ongoing conflicts in the Middle East and the protracted Russia-Ukraine war should keep a lid on any market optimism. Furthermore, the BoJ's summary of opinions from the July policy meeting released last week indicated that some members see room for further rate hikes and policy normalization, which should help limit deeper JPY losses and cap the AUD/JPY cross. This, in turn, warrants some caution before positioning for any further appreciating move.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.
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